By Karen Freifeld and Jonathan Stempel
NEW YORK, April 2 (Reuters) - A New York state appeals court on Tuesday cleared the way for bond insurer MBIA Inc to pursue a fraud lawsuit against Bank of America Corp over toxic mortgage securities.
A panel of New York’s Appellate Division said MBIA did not need to wait for loans to go into default before it could force Bank of America to buy them back.
The panel also said MBIA need not meet a particularly high burden of proof to show fraud at the former Countrywide Financial Corp, which Bank of America bought in 2008.
The panel, did, however, eliminate one means for MBIA to recover damages from Bank of America, the second-largest U.S. bank.
The case stemmed from insurance that MBIA had provided on $20 billion of securities packaged by Countrywide.
Tuesday’s decision upheld much of a January 2012 ruling by New York Supreme Court Justice Eileen Bransten.
MBIA, based in Armonk, New York, said the decision allows it to seek a full recovery from Charlotte, North Carolina-based Bank of America.
Once the world’s largest bond insurer, MBIA won approval from New York insurance regulators in 2009 to split into a municipal guarantee business and a structured finance unit that had suffered big mortgage losses.
Bank of America spokesman Lawrence Grayson declined to comment.
In a lawsuit that began in 2008, MBIA accused Countrywide of misrepresenting the underwriting on about 368,000 loans backing some $20 billion of securities it had insured from 2005 to 2007.
MBIA said it would not have provided the insurance had it known the truth about the securities, which it said have racked up $4 billion in losses.
In its unsigned decision, the appeals court let stand Bransten’s ruling that to show fraud, MBIA need show merely that Countrywide misled it about the residential mortgage-backed securities, not that the misrepresentations caused its losses.
It also said, “There is simply nothing in the contractual language” to require MBIA to wait for loans to go into default before it could force Bank of America to repurchase them.
The appeals court said Bransten was wrong to find that MBIA could obtain a form of relief known as rescissory damages, saying MBIA “voluntarily gave up the right to seek rescission.”
Rescissory damages could have served as an equivalent of rescinding or voiding MBIA’s insurance policies.
MBIA spokesman Kevin Brown said the insurer is pleased with the decision, which resolves “any questions over the strength of MBIA’s legal positions on the most significant issues.”
Harry Fong, an MKM Partners LLC analyst with a “buy” rating and $18 share price target for MBIA, said the decision “establishes a clear path for MBIA to recover everything it has paid out on its Countrywide RMBS exposure.”
The decision is separate from a March 4 ruling by another New York Supreme Court justice, Barbara Kapnick, that upheld the 2009 restructuring, in a defeat for Bank of America and France’s Societe Generale. Both banks are appealing.
In its annual report on Feb. 27, MBIA said its structured finance unit could be forced into liquidation or rehabilitation if litigation with Bank of America was not settled.
MBIA shares traded as much as 4.5 percent lower after parts of the appeals court decision surfaced, but soon recovered. They closed up 4 cents at $10.18 on the New York Stock Exchange.
The case is MBIA Insurance Corp v Countrywide Home Loans Inc et al, New York State Supreme Court, Appellate Division, 1st Department, No. 9672. The lower court case is MBIA Insurance Corp v. Countrywide Home Loans Inc et al, New York State Supreme Court, New York County, No. 602825/2008.